Daily Digest

Daily Digest - October 20

Tuesday, October 20, 2009, 9:45 AM
  • Challenging the Banks
  • A Media Failure Compounds The Financial Failure
  • The Crime of Our Time
  • Wall Street's Naked Swindle
  • Einhorn on gold, sovereign risk, and more
  • Russia Prepares To Short $18 Billion USD
  • Skerrit attends seventh ALBA summit in Bolivia agrees to forgo US dollar
  • CNPC and Gazprom Agree To Peg Gas Price To Asian Oil Basket - Mr Putin
  • Dollar to Extend Slide as Global Economy Recovers, Pimco Says
  • California hit by recession (Video)
  • The Underlying Size of US Economy


Challenging the Banks (M.W.)

Millions of families are going backwards to homelessness, and 
insecurity. Downward mobility is now a mass phenomenon.These large banks are run by the miscreants FDR called 
“banksters." They are reporting super profits and giving out obscene 
bonuses. Their lobbyists are blocking new regulations and eroding
 old ones while presiding over the largest transfer of wealth 
in history from the working poor to the flamboyant super rich. Can they be challenged?

So far, very few have been. While the banks are 
agressively lobbying; citizens groups are passively sending
 e-mails. Never before have so many allowed so few to dominate this 
discourse. The banks are clearly winning over the regulators and critics.

A Media Failure Compounds The Financial Failure (M.W.)

The Project on Excellence on Journalism ... released a study charging “that the gravest economic crisis since the Great Depression has been covered in the media largely from the top down, told primarily from the perspective of the Obama administration and big business, with coverage reflecting the concerns of institutions more than the lives of everyday Americans.”

The Crime of Our Time (M.W.)

Danny Schechter is a media activist, critic, independent filmmaker, and TV producer as well as an author of 10 books and lecturer on media issues. Some call him "The News Dissector," and that's the name of his popular blog on media issues. He's also the co-founder of Media Channel.org that covers the "political, cultural and social impacts of the media," and provides information unavailable in the mainstream.

Wall Street's Naked Swindle (Claire H.)

On Tuesday, March 11th, 2008, somebody — nobody knows who — made one of the craziest bets Wall Street has ever seen. The mystery figure spent $1.7 million on a series of options, gambling that shares in the venerable investment bank Bear Stearns would lose more than half their value in nine days or less. It was madness — "like buying 1.7 million lottery tickets," according to one financial analyst.

But what's even crazier is that the bet paid.

Einhorn on gold, sovereign risk, and more (nncita)

Two years ago, when he spoke at the Value Investing Congress, David Einhorn said Lehman was in deep trouble. Turned out it was a good call. Today he gave another keynote at the conference in which he argued the policies of the administration have put us on a very dangerous path, one which has encouraged him to buy physical gold as insurance against sovereign default(s).

Russia Prepares To Short $18 Billion USD (saxplayer00o1)

Russia is planning to issue $18 billion of dollar-denominated government bonds early next year. This will be the first government debt issue aimed at international investors since 2000. It will also be, conveniently, a huge $18 billion short-dollar position.

Skerrit attends seventh ALBA summit in Bolivia agrees to forgo US dollar (saxplayer00o1)

Prime Minister Roosevelt Skerrit was among nine regional leaders of the Bolivarian Alliance for the Peoples of the Americas (ALBA) who attended the seventh summit in Cochabamba, Bolivia. Delegations from Bolivia, Cuba, Venezuela, Ecuador, Nicaragua, Honduras, Dominica, Saint Vincent and the Grenadines, and Antigua and Barbuda agreed to forgo the US dollar for a new regional trade currency to be called the Regional Single Compensation System (sucre). The Sucre will “replace the dollar in commercial exchanges,” between member nations.

CNPC and Gazprom Agree To Peg Gas Price To Asian Oil Basket - Mr Putin (saxplayer00o1)

Mr Putin also said Russia might consider payments for the gas supplied to China in rubles. He said that "We have talked about this possibility with China and our energy companies have raised this issue for example Gazprom." He added that "We could consider this, but this does not mean our Chinese partners have to have rubles. We're prepared to accept payment for yuan but a balance would be needed. He also said the next meeting of the Shanghai Cooperation Organization finance ministers will look at an initiative by Kazakhstan to institute electronic settlements in national currencies.” 

Dollar to Extend Slide as Global Economy Recovers, Pimco Says (saxplayer00o1)

The U.S. dollar will extend declines as the global economy’s recovery prompts investors to shift away from U.S. assets, according to Pacific Investment Management Co., which runs the world’s biggest bond fund.

California hit by recession (Video)

The Underlying Size of US Economy (james_knight_chaucer)

The real concern is the question of what would happen if the overseas lenders were to stop lending. In this event, the US economy would quickly revert to its real size, and that would be significantly smaller than today. The results of any halt in credit provision for the US are extremely worrying, as support for a large percentage of the economy would disappear. The result would be that unemployment would explode upwards, government could not operate at current levels, and the shock would likely precipitate a broader collapse in the economy.


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Re: Daily Digest - October 20

   "PARIS, Oct 20 (Reuters) - The United States is pumping out liquidity to try to inflate away its debt, leading to the depreciation of the U.S. dollar, Henri Guaino, a top advisor to French President Nicolas Sarkozy said on Tuesday."


'Commercial real estate prices are forecast to fall additional 17 percent through the fourth quarter of next year, Goldman Sachs Group Inc. said in a Sept. 30 report, citing scarce credit, rising vacancy rates and the risk of forced sales.

Late payments on commercial mortgages jumped sevenfold in September from a year earlier, as installments on $22.4 billion of mortgages were at least 60 days late, Credit Suisse analysts reported Oct. 12. The delinquency rate of commercial mortgage payments bundled into bonds rose to 3.64 percent in September from 0.54 a year earlier, Moody’s said Oct. 13."

"Rising unemployment, the swelling ranks of the uninsured, outdated technology and the state's budget problems have led to a backlog of 12,000 Medicaid applications in Kansas, health officials said.

A contractor that processes applications for the Kansas Health Policy Authority is supposed to complete them in two to six weeks, but has taken up to four months in some cases."

"The weakness of the U.S. dollar has many policymakers in Asia's reserve-rich countries studying ways to reduce the portion of dollar assets in their funds, central bank officials and analysts said yesterday. They said Korea, whose foreign exchange reserves stand at $254.2 billion, was no exception.

They said the Bank of Korea is mulling reducing the proportion of dollar-denominated assets in reserves, which currently stands at 64.5 percent of the total fund."

"As bad as the weaker-than-expected tax revenues look, Stinson and other state officials explained this may be the least of Minnesota’s problems.

Stinson said Minnesota will likely begin the 2012-13 biennium with a budget deficit of at least $4.4 billion; however, House Chief Fiscal Analyst Bill Marx said the true number could be as high as $7.2 billion"

"The International Monetary Fund is considering creating a new programme to discourage member countries from building up currency reserves, John Lipsky, the IMF’s first deputy managing director, said on Monday.

“We are exploring the possibility of improving our existing facilities or adding other insurance-like facilities that would give our members greater confidence that they don’t need to self insure by building up reserves,” Lipsky told reporters at a conference in Mexico."

........Is the IMF adding this to their "programme" of collecting shoes for the poor?

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Colorado economic stories du jour

From this morning's Denver Post...


Results of the auction of Greeley's New West Bank assets (in July it was the costliest takeover to date for FDIC, dunno if that still stands)

The federal government salvaged only 27 cents on the dollar when it auctioned hundreds of New Frontier loans last month.

The sale generated $157 million on a portfolio once valued at more than $500 million, according to government sale records.

The fire-sale prices underscore the poor quality of agriculture loans left stranded by the Greeley bank, whose failure in April remains one of the costliest closures in the U.S. this year.

One package of New Frontier notes valued at $5 million sold for $122,778 — 2 percent of its value. Another batch valued at $28 million went for $3 million.

and this story about CSU considering privatization -- a scare tactic at this point, I think, but I wouldn't be surprised as the  state budget situation continues to erode if this becomes a more likely scenario



As state funding cuts loom in 2011, leaders of the Colorado State University system have started considering an option unheard of in all but a handful of states: converting to a part-public, part-private structure in which students pay more for costlier degrees.

If implemented, the change could mean CSU's $4,800 annual in-state tuition jumps to about $13,500 for liberal-arts programs and as much as $20,000 for engineering degrees at the Fort Collins campus.


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Re: Daily Digest - October 20

Sue, that "solution" is being considered in Arizona too for the state universities.

JAG posted a link to this yesterday and I think it explains one reason why the FED doesn't want the books opened and the bailout arrangements examined. Funds were provided to foreign central banks in order to keep the system from collapsing. This fact exposes how fragile and how screwed up the system is. The vulnerabilities have not been addressed - so any shock could bring on another crisis.

How The Federal Reserve Bailed Out The World
By: Tyler Durden   Monday, October 19, 2009 5:12 PM





In a nutshell what happened is that short-term sources to sustain the massive dollar funding mismatch disappeared virtually overnight, and CBs were suddenly facing a toxic spiral of selling increasing more worthless assets merely to satisfy currency funding needs in an environment where all of a sudden nobody was willing to provide FX swap lines. So what happens next...

The Fed Bails Out The World

No, that is not an overstatement: had the Fed not stepped in, the rest of the world (which optimistic pundits tend to forget exists in their bubble view of the US market as the one and only) would have simply collapsed on itself as the $6.5 trillion dollar funding gap closed in on itself, causing a indiscriminate selling off of all dollar denominated assets. The implosion of the basis trade would have seemed like a picnic compared to what was about to ensue had the Fed not stepped in to perpetuate the Fiat banking way of life.

The severity of the US dollar shortage among banks outside the United States called for an international policy response. While European central banks adopted measures to alleviate banks' funding pressures in their domestic currencies, they could not provide sufficient US dollar liquidity. Thus they entered into temporary reciprocal currency arrangements (swap lines) with the Federal Reserve in order to channel US dollars to banks in their respective jurisdictions (Figure 7). Swap lines with the ECB and the Swiss National Bank were announced as early as December 2007. Following the failure of Lehman Brothers in September 2008, however, the existing swap lines were doubled in size, and new lines were arranged with the Bank of Canada, the Bank of England and the Bank of Japan, bringing the swap lines total to $247 billion. As the funding disruptions spread to banks around the world, swap arrangements were extended across continents to central banks in Australia and New Zealand, Scandinavia, and several countries in Asia and Latin America, forming a global network (Figure 7). Various central banks also entered regional swap arrangements to distribute their respective currencies across borders.


In contrast to many previous international financial crises, it was banks' international exposures to other industrialised countries that deteriorated, and the global interbank and FX swap funding structure which seized up. The build-up of such stresses at the global level can only be identified by tracking the extent of cross-currency funding, and by implication, banks' reliance on short-term interbank and FX swap positions. What pushed the system to the brink was not cross-currency funding per se, but rather too many large banks employing funding strategies in the same direction, the funding equivalent of a "crowded trade". Only when examined at the aggregate level can such vulnerabilities be identified. By quantifying the US dollar overhang on non-US banks' global balance sheets, this paper contributes to a better understanding of why the extraordinary international policy response was necessary, and why it took the form of a global network of central bank swap lines.

Why is this critical? We are now back at a time when the only gains in the stock market are at the expense of dollar destruction, with a concomittant funding for dollar denominated assets. In one short year since the collapse of Lehman we have gone back to the same dollar funding risk exposure as was on the books in these days before Dick Fuld's empire unravelled. While whether or not the Federal Reserve stepped beyond its bounds in practically bailing out not just Goldman Sachs, but as this paper has proven, virtually the entire world, is not up to us to decide. However, a critical topic is: have we learned anything from the implications of an unprecedented dollar funding gap, which is likely back to record levels once again? What is obvious is that the Fed's current policy of a weak dollar, contrary to its repeated lies otherwise, is simply enhancing the dollar funding moral hazard: and the breaking point will come sooner or later with disastrous consequences.

As the H.4.1 discloses weekly, the Fed's liquidity swaps are now back to almost zero. This means that foreign Central Banks believe they have the FX swap and dollar maturity situation under control. They thought the same before Lehman blew up. And they were wrong. As the DXY continues tumbling ever lower to fresh 2009 lows, the trade de jour is once again the dollar funding one, although unlike before when the Yen was the carry currency of choice, this time it is the dollar itself, positioning banks for the double whammy of not just a dollar funding shock, but one coupled with a potential massive and historic short squeeze. If and when an exogenous event occurs, not even $6.5 trillion in Fed swap lines will be sufficient to bail out the world economy. It is time someone in Congress asks the Chairman all the pertinent questions that evolve from this analysis and how he is prepared to handle its next, much more vicious, and likely terminal, iteration.

Full BIS paper.

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Re: Daily Digest - October 20 (Russia Prepares To Short $18 Bill

I would appreciate if someone can confirm (or clarify ) what I understand from this article:

When the Russian Govt. issue Dollar denominated debt, they receive USD from people, and they are planning to spend all the dollars as soon as they can, now if the dollar goes down then they will be better off returning trash (possibly! ) to the international investors. Additionally they can issue the bonds at lowest interest rates and hope to find buyers.

Thanks in advance


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Re: Daily Digest - October 20


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Re: Daily Digest - October 20

I am a long time reader, and very rarely post, but this does not look good:

Citi closing Mastercards without warning

NEW YORK - Shannon Burdette tried to pay with her Shell Mastercard after filling up her gas tank this weekend but found the card rejected.

 Confused, she called the customer service line on the back of the card, issued by Citibank, and was told the account was closed because of something that appeared on her credit report. But when the Sykesville, Md., resident got a copy of her credit report online, the only negative thing she saw was "closed at credit grantor's request" on the Shell MasterCard account.

 "They said there was a routine review," said Burdette, who maintained that she and her husband, Brian, used the card regularly and always paid the bill on time.

Burdette isn't alone. People across the country have been reporting similar experiences in postings on various consumer Web sites.

Citi confirmed the basics. The bank said in a statement it "decided to close a limited number of oil partner co-branded MasterCard accounts." That includes not only Shell, but Citgo, ExxonMobil and Phillips 66-Conoco cards.




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Re: Daily Digest - October 20

 I have a question. When Russia is offering bonds in dollar denominations, does that mean that when the bonds are redeemed that they are paid back in USD or does the buyer of the bond have to first pay in USD to buy the bond ? I am trying to understand the implications of this. I am a novice in the understanding of how currencies are traded ?

Any short input  would be appreciated.



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Re: Daily Digest - October 20

Hi Tommygun,

When you buy a US dollar bond, from anyone (lets say Russia here), you give Russia US dollars that they will pay back to you at a later time.  They take the money and use it however they want.  If the value of the US Dollar declines, that means its cheaper for them (all other variables remaining constant) to pay back later. 

For example, say you give them $100 Dollars and they give you a bond cert (in electronic form of course).  If in X years, when its time for them to repay, the value of the dollar has declined 25%, that means they are really only giving you back something that costs them 75% of what they loaned (interest excluded).  In effect, its a short on the dollar.

In Russias case however, its not a short as much as it is a hedge against the dollars they have in the coffers.  They have about the same amount of dollars as they are issuing bonds.  In effect, they are just reducing their dollar exposure rather than actualy shorting it.  If they had no dollars or were issuing more bonds than the amount of dollars they held, then this could be considered a short position.

Hope this helps.

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Re: Daily Digest - October 20


Thanks for the explanation. I got it.

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Re: Daily Digest - October 20

Benjamin Barber says it's all evil big business and Schiff says it's all evil big government. No one admits they're the same people now. Neither are working in our interest. Both must be disciplined and brought under control...by the people, who are neither, bigger, and both.          


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Re: Daily Digest - October 20

I've just read the Rolling Stone article - Wall Street's Naked Swindle - and what a sad tale it is. Almost beyond belief. I feel sad for the future of your country. It seems incredible that the frauds are allowed to continue and that perhaps the only end to them is some sort of social revolution.

Dick (Tasmania)

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Re: Daily Digest - October 20

I think they have a serious capital problem, i.e. they can't back the credit limits their cardholders have with actual money, not even to the
fraction required by regulators (probably due to a great many of their cardholders being AT their limits!)

Also, many Citi cardholders in the USA are receiving letters this week telling them they have a new interest rate: 29.99% p.a. Merry Xmas!
(I think it's more complicated than that, with some fees and credits involved, but effectively: 29.99%!)


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Rolling Stones article/bonds

The Rolling Stone article was a tremendous read. It's a bit long, but worth your time.

One thing that I did not understand was this:


How about bonds? "Naked short-selling of stocks is nothing compared to what goes on in the bond market," says Trimbath, the former DTC staffer. Indeed, the practice of selling bonds without delivering them is so rampant it has even infected the market for U.S. Treasury notes. That's right — Wall Street has actually been brazen enough to counterfeit the debt of the United States government right under the eyes of regulators, in the middle of a historic series of government bailouts! In fact, the amount of failed trades in Treasury bonds — the equivalent of "phantom" stocks — has doubled since 2007. In a single week last July, some $250 billion worth of U.S. Treasury bonds were sold and not delivered.

Not sure I quite understand what that last sentence in bold means.

vvolf's picture
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Re: Daily Digest - October 20

Time to stop screwing with the publics money and separate banks and wall street again.  Or is it all too late for this?



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